Let’s say at this point you’ve finished step one and determined that your startup idea solves a painful problem. How valuable is that solution? Enter: Question two on your startup litmus test: “Will people pay for your solution or product?”

Ideas are great, but they don’t make money. Businesses make money. Once you can validate that people will open their wallets or their checkbooks for your product or service, then you have business idea.

*Disclaimer: There are of course well-known exceptions to this rule: early Facebook, Twitter, Snapchat, Instagram, and other services that are in the business of accumulating users and eyeballs with the “monetize later” strategy and no revenue model. Few are successful, and chances are you are not one of them.

It just makes sense. Before you pour your hard-earned cash and even more importantly, your time, into a business, you should want to know that the business would make money for you. Even before building a full or partial product, it is important to validate your assumptions.

Hiten Shah, co-founder of the successful analytics software KISSmetrics lamented his oversight in validating one of his former business ideas.

"My co-founder and I spent $1,000,000 on a web hosting company that never launched. We were perfectionist so we built the best thing we could without even understanding what our customers cared about."

Zipcar co-founder Robin Chase has a similar experience after skipping validation.

“Get to your customers as fast as possible & learn from them to build your product. With my second company, we spent too much money on the website and software before engaging with our first customers. This meant that part of our learning was undoing our first guesses.” [1]

How to Validate

Validation can come in several forms, and ultimately your metric for success is your own decision. Lean Startup Machine CEO Trevor Owens defines success criteria as, “Minimum amount of validation that we need, to know this is going to be successful and that we have a viable opportunity.” [2]

Validation can be done fairly inexpensively. It can take the form of letters of intent, preorders, polling, soliciting interest via dummy ads, or collecting emails via a launch page.

Here are a few simple ideas for collecting validation:

1. Landing Pages

Create a basic landing page promoting your product or idea using the top keywords for your product based on Google Keywords and promote it through your social channels. These pages will show you click through rates as well as collect emails for leads.

Surveys can be a powerful tool to gather a lot of data quickly, but must be done correctly to avoid several inherent biases and leading questions.

Qualaroo and GrowthHackers.com founder Sean Ellis recommends this survey [3] [link to: http://survey.io/survey/demo] for assessing market fit. A 40% response rate of “Very disappointed” on the question of “How would you feel if you could no longer use ___” is a general rule of thumb for an indication of market fit.

Would you use this product yourself? If the answer is no, what would compel someone else to? Finding an advisor within the industry your business serves is invaluable.

4. Nothing beats pounding the pavement

Talk to your potential customers – pitch your idea, gain feedback, and try to sell. Impersonal surveys are a great way to amass a volume of data, but it will likely only scratch the surface. Have in-depth conversations with your target customer, and try to secure letters of intent if applicable.

(Market) Size Matters

At this point, you’ve determined that you have customers who are willing to pay you for your product or service. Congratulations, you have a business! Unfortunately, there may still be some bad news in the form of your third hurdle: “How many people are willing to pay?”

Market size is one of the most important aspects of vetting a startup idea. In fact, it is one of the top criteria for investors, and a massive market is an absolute necessity for an entrepreneur searching venture capital.

“If you can’t make the case that you’re addressing a possible billion dollar market, you’ll have difficulty getting VCs to invest. (Smaller, venture-style investors like angels and seed funds also prioritize market size but are usually more flexible – they’ll often invest when the market is “only” ~$100M).” [4]]

Chris Dixon

Investor

The explanation is simply mathematics. For example, would you rather have the #1 sporting goods store in a town of 100 people, or the #3 sporting goods store in a city of 100,000? For a business to be big and scalable, the market must be proportionately big. Upfront Ventures Partner Mark Suster agrees with Dixon.

“Your goal here is just to stretch my imagination and get me excited by the future potential. You need to get over that all important VC hurdle … this is a BIG market.” [5]]

Market sizing is important, and must be calculated carefully. Start with your Total Addressable Market (TAM) by defining the industry you are operating in. Then you segment that industry number down to the segment within the industry you are working in, keeping in mind competitors’ numbers for benchmarking comparisons.

Too often entrepreneurs simply get an industry number and say the dreaded, “If we capture just 1% of this market…” This strategy is lazy and makes an investor’s eyes glaze over. Do the due diligence and avoid the blanket 1% top-down approach.

Some businesses are not huge opportunities. Some entrepreneurs are happy with starting lifestyle businesses that they can own and operate, while providing a comfortable income. If that is you, that is just fine! You can keep that in mind as you define your own metric of success as mentioned earlier.

However, if the opportunity you are chasing is not a big one, you will have a hard time attracting the attention of investors.

Now that you’ve determined that you have paying customers and a market worth pursuing, unfortunately the road does not get much easier. It’s time to begin building your product and Chapter 3 will detail how to gather social proof and traction – instrumental evidence and metrics to show investors and maintain momentum for your startup.

Follow

Fundable is a software as a service crowdfunding platform. Fundable is not a registered broker-dealer and does not offer investment advice or advise on the raising of capital through securities offerings. Fundable does not recommend or otherwise suggest that any investor make an investment in a particular company, or that any company offer securities to a particular investor. Fundable takes no part in the negotiation or execution of transactions for the purchase or sale of securities, and at no time has possession of funds or securities. No securities transactions are executed or negotiated on or through the Fundable platform. Fundable receives no compensation in connection with the purchase or sale of securities.